Reduction of Principal Business Criteria Below Fifty Percent Entitles Company to Voluntarily Surrender NBFC Registration

Petitioner No. 1 is a Non-Banking Financial Company (NBFC) holding a Certificate of Registration (CoR) since 1998

In 2024, its Board decided to exit the NBFC business due to commercial unviability and high compliance costs

On February 18, 2025, the Reserve Bank of India (RBI) notified the Petitioner of a shortfall in the mandatory Net Owned Fund (NOF) requirement

Consequently, the Petitioner applied for voluntary surrender of its CoR on March 18, 2025

On July 4, 2025, the RBI rejected the application, asserting that the Petitioner still met the "Principal Business Criteria" (PBC) as of December 31, 2024

During the pendency of the writ, the Petitioner reduced its financial assets to 0.81% of total assets to fall below the PBC threshold

The Petitioner challenged the rejection on grounds of violation of natural justice and the fundamental right to carry on business

1. Whether the RBI can reject a voluntary surrender of a CoR if the company meets the Principal Business Criteria (PBC) at the time of application.

2. Whether the rejection of the surrender application without providing a reasonable opportunity of hearing is legally sustainable under Section 45-IA(6) of the RBI Act.

The court primarily applied Section 45-IA(6)(i) of the Reserve Bank of India Act, 1934, which empowers the Bank to cancel a CoR if a company ceases to carry on the business of a non-banking financial institution

It relied on the Second Proviso to Section 45-IA(6), which mandates a "reasonable opportunity of hearing" before an order of cancellation is made

The court also referred to the RBI Press Release dated April 8, 1999, which defines the "Principal Business Criteria" as financial assets and financial income both exceeding 50% of total assets and gross income respectively

Furthermore, the court considered the fundamental right to carry on business under Article 19(1)(g) of the Constitution of India and the precedent in Harinagar Sugar Mills Ltd. v. State of Maharashtra (2025)

The court observed that while the RBI initially rejected the surrender because the Petitioner met the PBC, the RBI subsequently clarified that reducing PBC below 50% while holding a CoR does not violate registration terms

The court noted that the Petitioner had actively reduced its financial assets to 0.81% to demonstrate it had ceased NBFC operations

Crucially, the court found that the RBI failed to provide the Petitioner with a notice or a "reasonable opportunity of hearing" before rejecting the surrender application, which is a statutory mandate under the Second Proviso to Section 45-IA(6)

The court reasoned that since the Petitioner now complies with the twin conditions for ceasing NBFC business (PBC < 50%), the RBI's prior refusal based on historical data without a hearing was improper

It held that the RBI must provide a hearing before deciding on the cancellation of a CoR

The RBI was directed to reconsider the Petitioner’s surrender application afresh, taking into account the updated financial data showing reduced PBC, and to pass a reasoned order after providing a personal hearing within four weeks

The petition was disposed of accordingly